Reality TV Investor Loses Big to ‘Buy American’ Fallacy
http://hanseconomics.com/2012/02/12/rea ... n-fallacy/
Bad economics and reality television just made Donny McCall an overnight hero. Unfortunately for him, it’s all for naught.
On a recent episode of ABC’s Shark Tank, a show that features a panel of super-rich investors negotiating investment proposals from entrepreneurs, Invis-a-Rack owner Donny McCall was denied $100,000 to help expand his business because of his refusal to outsource any part of his production structure to foreign labor markets. Because of a love for his country and his ailing hometown economy, he decided beforehand that looking overseas for cheaper production costs was simply unacceptable. “It’s high time that somebody stood up and not just bow down to the automatic of going to overseas to do anything” he said in a post-show interview.
McCall has been praised all around for his apparent “patriotism” and refusal to outsource. He appeared on Fox and Friends to discuss his experience on Shark Tank, and his patriotic spirit has earned him the love of Americans everywhere. A Washington Times commentator said he was simply “doing the right thing”, and one blogger has condemned the “quick-kill mentality” that supposedly kept the venture-capitalists from seeing things the right way and investing in McCall’s business.
But there is one problem with this: Producing overseas does not hurt American workers. McCall’s refusal to outsource production only limits the growth of his American-owned corporation, in turn limiting the size of the American economy.
Not surprisingly, the venture-capitalists knew very well why McCall’s insistence on “American-made” product was unwise and ultimately self-defeating. All five of them rejected his otherwise-enticing offer, saying he was not willing to do what it took to take his business to the next level. One wisely remarked that by refusing to outsource, he was limiting the number of Americans who would benefit from his product, as well as the number of Americans he could ultimately employ. McCall offered no response but to stand by his decision.
As I’ve shown before, the notion that ‘buying American’ is inherently good for the American economy is simply wrong. While it may seem that such a claim is true on the surface, a deeper investigation into just what happens when consumers pay more to ‘buy American’ shows that not only does doing so not help the economy, but it actually limits economic growth.
When foreign producers sell goods in the United States, it is because they are making a profit. They are supplying goods that American consumers demand at prices they agree to pay. By doing business in the US , they are inevitably in competition with American firms as well. This has the effect of incentivizing all firms to increase the quality of their good while lowering prices. This in turn benefits the American consumer, who has more goods to choose from while keeping more of their income.
In McCall’s case, outsourcing production would allow him to lower production costs and sell his product at a lower price. This would make the Invis-a-Rack available to more Americans, who would in turn use it to run their own businesses and lower their own production costs. He would be able to hire more American workers, and perhaps begin to sell in foreign markets as well, eventually bringing revenue into the United States from foreign markets.
Perhaps McCall’s economic mistake is most obviously revealed in the fact that he seemed to have no problem outsourcing to other states. Indeed, he said his parts come from several suppliers around the country. But according to his logic, such outsourcing harms his hometown–which he claims is suffering economically. Why outsource to Ohio or Michigan when the same production can be done in one’s own state or hometown? I would wager that he’d say it still benefited the American economy. But if that is the case, does not outsourcing to China benefit the global economy, in turn benefiting Americans?
McCall is wrong, and his stubbornness harms both his business and his countrymen. His adherence to principle is admirable, but the principle itself is flawed.
The ‘buy American’ fallacy is costly. It inhibits economic growth, keeps prices high, and limits trade between nations. It cuts off capital flows to developing economies and restricts consumer choices. It makes small-business owners feel guilty for using cheap overseas labor to start businesses in the US–some of which ultimately create thousands of American jobs. It contributes to the “fortress mentality” that has millions of Americans erroneously believing that sacrificing innovation is more than acceptable if it means one more step down the road to American economic ‘self-sufficiency’.
But for Donny McCall, the fallacy has been costly indeed.